The merger will make Watson Pharmaceuticals the world's third largest generics drugs maker with a combined revenue of $8 billion, while increasing its international presence. In unveiling the deal, Watson also said that a combination of synergies and growth opportunities will make the merger additive to earnings in coming years.

"Actavis dramatically enhances our commercial position on a global basis and brings complementary products and capabilities in the United States," said Watson Pharmaceuticals CEO Paul M. Bisaro, in a statement. "In a single, commercially compelling transaction, we more than double Watson's international access and strengthen our commercial position in key established European markets as well as exciting emerging growth markets, including Central and Eastern Europe and Russia."

Actavis operates in 40 countries and markets more than 1,000 products globally. In 2011, the company had roughly $2.5 billion in revenue. The company makes generic versions of Ritalin, a drug to treat attention deficit disorder and Ambien, a sleeping pill. Watson Pharmaceuticals meanwhile produces generic versions of Pfizer's ( PFE) Lipitor.

Watson's purchase price is roughly 20% less than initial reports. On March 21, Reuters first reported that a prospective deal could be cut at an estimated 5.5 billion euros or $7.3 billion. Since those reports, Watson Pharmaceuticals shares have rallied on expected cost synergies and growth prospects. Shares rallied nearly 6% in after-hours trading on Wednesday, signaling that investors welcomed the lower than previously reported purchase price of Actavis.

The deal is structured so that the company will an make initial cash payment of 4.25 billion euros $5.6 billion and will deliver a performance payment of up to 5.5 million shares in its common stock at a value of $60 in 2013 if all M&A targets are met. That would push the deal to roughly $5.9 billion.

Analysts mirrored the company's bullish sentiment.

"We see opportunities for strong earnings per share accretion, substantial value creation for Watson Pharmaceutical shareholders, a reasonable purchase price, minimal US product overlaps, and synergies and footprint expansion in manufacturing," noted Credit Suisse analyst Mike Faerm in a March research note. Faerm estimated that a merger could generate $1.62 or 28% of Watson Pharmaceuticals in 2015 EPS; however that note assumed a $6.9 billion purchase price.

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After the deal is completed, Actavis is expected to tilt 40% of Watson Pharmaceuticals generic drugs revenue outside of the U.S., in a merger that is expected to create $300 million in cost synergies in the next three years and increase Watson Pharmaceutical's overall revenue by 16%. Overall, those benefits and synergies are expected to add 30% to Watson's non-GAAP 2013 earnings per share, the company said in a statement.

The tie-up is also expected to ratchet up Watson Pharmaceuticals competition against larger generic drugs makers like Mylan ( MYP) and Teva Pharmaceuticals ( TEVA).

"Building on this strong foundation, the combination of Watson and Actavis will result in a company of the size required to position itself as a strong player in the generic pharmaceutical industry," said Actavis CEO Claudio Albrecht.

Actavis was taken private in a 2007 leveraged buyout by Icelandic tycoon Bjorgolfur Thor Bjorgolfsson. Since then, Reuters reported that the company has been a target of continued consolidation in the generic drugs sector, or possibly an initial public offering. In the buyout deal, Deutsche Bank financed $5 billion in buyout loans and is Actavis's largest creditor. In the fourth quarter of 2011, Deutsche Bank took a charge of 407 million euros on the loan.

In a statement Bjorgolfsson supported the merger. "I saw a great opportunity in the combination of these companies and have worked relentlessly for the past several months on making it happen," Bjorgolfsson said in a statement. "We, the shareholders, are happy to take our consideration in shares of Watson common stock as we believe in the future value and growth prospects of this great combination of assets and talent. This is a dream combination in this industry."

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